April 01, 2009

When did globalization begin?

In the 1990s, with the explosion of cross-border finance? In the 1950s, with the Bretton Woods regime and its institutions (GATT and the IMF)? During the 19th century, under the classical gold standard? In the 17th century with chartered trading companies shipping everything from slaves to spices across the globe? Or around 1000, with its extensive transcontinental trade in pepper, horses, silk, and textiles?

All of the above, and none of the above. The closer one looks in history, the more difficult it becomes to identify a clear point of transition towards globalization. (Retreats from globalization--such as occurred during the Napoleonic Wars or the interwar period in the 20th century--are considerably easier to identify). On the other hand, even today the world economy remains a lot less globalized than we often take it to be--at least when measured by the economist's yardstick for market integration, the degree of price convergence across national markets. See my colleague Robert Lawrence's estimates, for example.

The conventional wisdom is that the first era of globalization began in the 19th century--with Britain's repeal of its Corn Laws in 1846 and the spread of the gold standard. The title of this post comes from an article by Kevin O'Rourke and Jeffrey Williamson who showed that there was limited price convergence globally prior to the 19th century despite the relatively rapid increase in intercontinental trade spurred by the discovery of the New World, the establishment of chartered trading companies, and the Atlantic slave trade (Europ. Rev. Econ. Hist., 2002). What made the difference in the 19th century was not just liberalization and greater competition, but what O'Rourke and Williamson call a transport revolution--the significant decline in oceanic freight costs. As a a result, the growth rate of trade volumes more than tripled, as is shown in a table from a later O'Rourke-Williamson article:

But a more recent paper complicates this picture significantly. In a 2009 article in the same journal (Europ. Rev. Econ. Hist.), Klas Rönnbäck shows that there may have been notable price convergence in many commodity markets prior to the 19th century. To my mind, though, the evidence he presents is not entirely convincing because Rönnbäck focuses too much on absolute price differences, instead of relative (or percentage) differences. The former are not a very good guide when the level of prices changes over time.

Here is the picture for sugar, for example:

At first sight, the picture seems to show significant convergence in prices in the second half of the 17th century, but this is an optical illusion due to the general decline in sugar prices during that period. It would have been easier to see this if the vertical axis was in logs. In any case, Rönnbäck has cast some doubt on a strict 19th century view of globalization.

Two lessons, then, for today. First, as special as it may have seemed, the last quarter century of globalization did not really represent a qualitative break with the past: it was what we have had for a very long time, experienced perhaps a bit more intensely.

And second, short of war, we are unlikely to see a drastic reversal in globalization. Economic globalization has been going on for far too long for even the crash of 2008 to derail.

On the contrary, I think that financial globalization in the last 30 years is a *distinct* qualitative break from the past.

For example, the volume of foreign exchange turnover worldwide has gone from $17 trillion in 1979 to $300 trillion in 1995 (see the BIS Annual reports). Likewise, the size of the international banking market as a share of world output has expanded dramatically over that time, from 1% in 1969 to 37% in 1991 (see UNCTAD, 1994). And these are just two random examples; you can find many others if you look. While pre-WW2 data for these things is generally nonexistent, I can bet that current levels of financial globalization have not previously been experienced.

Trade is not the story of globalization. Finance is. We're learning that far more clearly now.

Paris, the most-visited city in the world, is getting clobbered by a sharp downturn in global travel. International passenger arrivals at the city's two airports were down 8.1 percent year-on-year in February, and hotel occupancy rates dropped 10 percent. Even visits to the Eiffel Tower have fallen 7 percent from last year. (Overall, the US Commerce Dept. figures visits by Americans to Europe tumbled 7 percent last year.)

That's putting a big dent in the city's $13.2 billion-a-year hotel and restaurant business, which, along with other tourism-related activities, employs 12.1 percent of the city's population. "It's a catastrophe," says Bertrand LeCourt, president of l'Hôtellerie Familiale, a hotel owners' association.

Empty Rooms and Tables

It's not just sightseers who are staying away. Business travel held up relatively well during 2008, because many conventions and trade shows were planned well in advance. But now it's slumping, too. "February really scared us," said Gérard Cros, owner of the Sport Hotel, a 95-year-old establishment near the Bois de Vincennes that caters to business travelers. Occupancy at the hotel in February was down 10 percent from a year earlier, Cros says.

Swiss bank to cut 8,700 jobs
UBS, Switzerland's biggest bank, has said it will cut 8,700 jobs worldwide by the end of next year, after reporting first quarter losses. UBS said on Wednesday it would need to shrink its workforce in order to reduce costs, after its losses reached about $1.75bn for the first three months of this year. The bank, which has been hit hard by the financial downturn, said it will "adapt its size to the changed market conditions and lower levels of business.'' It said the bank...

A year's output is the value of goods and services produced over that year, while equity values reflect the (discounted) value of all future streams of profits. If you are comparing the two, you must at least have a sense of what a decent benchmark for comparison would be. http://www.watchgy.com/

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